Manish Bahl's Blog

Infosys recently won a financial services systems integration deal from the Department of Post in the Ministry of Communications and IT of India worth INR 700 crore (US$126 million). In 2010, India’s Cabinet Committee on Economic Affairs approved India Post’s “IT modernization” project, which was divided into eight separate contracts worth a total of $337 million. With this deal, Infosys has won one of these eight contracts.

According to the terms of the contract, Infosys will commission both hardware and software – Intellectual Property (Finacle Core Banking and McCamish Insurance products) over India Post’s approximately 25,000 departmental offices over a period of 24 months. The contract, which is valid for seven years, includes managed services, application support, and infrastructure operations. More details about the deal can be found here.

Let’s look at what this deal means to Infosys and to India Post:

Infosys Gets More Business — But Also Some Risk

India accounts for a mere 2.2% of Infosys’ global revenue, but this is one of the company’s largest deals in India. Infosys’ Finacle solution is well accepted and used by the banking sector in India; this win is a perfect match for company’s strengths in the Indian market. However, the fixed-price contract specifies that Infosys will invoice India Post on the basis of milestones achieved at various intervals — meaning that the company will have to deal with a highly complex and bureaucratic government system, which could stretch out the implementation period for the company and affect the profitability of the project. It will be interesting to watch how Infosys manages to execute this project in a timely manner.

For India Post, Focus Is The Key To Achieve Government's Financial Inclusion Goal

India Post has the largest postal network in the world, with 155,669 post offices across the country, 89% of which are in rural areas. Forrester predicted that India’s 12th National Five-Year Report would drive the Indian government to leverage technology to expand the public financial network in rural areas — and it’s encouraging to see the government finally leverage the India Post network to achieve its financial inclusion objective. However, there are some caveats:

·The slow-working pace within India’s public sector and the lack of a government CIO role mean that vendors will continue to cope with disjointed efforts within the government when pursuing technology initiatives, which may result in delay and complexity in project execution.

·India Post registered a deficit of around $1.1 billion in the last fiscal year. While operations accounted for about 67% of India Post’s total expenditures, there was an increase of about 8% in the segment’s expenditures. It will not be easy for India Post to turn its operational performance around simply by installing Infosys’ solution. Moreover, India Post requires much greater focus in terms of program management, coordination within employees, selection of the right team and best practices to meet the timeline.

Comments

So far Infosys has shied away from the domestic market with a stubborn focus on 'high-quality' volume growth, much to the benefit of peers who took advantage of the surging local demand.
The India Post deal in a way indicates that Infy is slowly coming to terms with the changing nature of the industry and is opening up to the idea of preferring growth over margins. Of course, this being a Finacle deal will perhaps not dent margins too much but like you mentioned, bureaucracy, high receivables etc will certainly be issues.
Over the medium to long term, the domestic market provides huge opportunities for IT vendors in various areas of banking and financial inclusion and e-governance that Infy cannot afford to miss out on. India Post is a step in the right direction and Infy should get more actively involved in various other government projects, even if it comes at the cost of margins.

Thanks Priya. Great thoughts and I agree with you. I believe the key for Infosys is to align its business objectives with government priorities to gain maximum. We believe vendors who do that will gain maximum more from government spending than those who fail to do so.